First, as I discussed yesterday, CBO’s estimates indicate that the bill would cost a bit more than $900 billion over the next ten years, not the $829 billion that most commentators are using. The latter figure reflects the costs of expanding coverage, but does not include other efforts — e.g., paying more to physicians under Medicare and expanding the Medicare drug benefit — that are also included in the bill. The $75 billion difference strikes me as important in itself, but the larger issue may well be how much additional spending is in the House bill. The previous version of the House bill was often described as costing about $1 trillion over ten years, but if you include all the new spending in it, the actual figure was north of $1.5 trillion.

Second, as I noted in my discussion of the original Baucus proposal, the bill satisfies all the key budget tests, at least as it is written. The tax increases and spending reductions in the bill more than offset the costs of expanded coverage (and the other spending increases) over the next ten years and the subsequent decade. In short, the bill makes a serious effort to take budget concerns into account. On this score, it is much better than what we’ve seen from the House.

Third, there are serious questions, however, about whether the spending reductions and tax increases scheduled in the bill will actually come to pass. As we’ve seen with the doctors in Medicare, on the one hand, and the alternative minimum tax, on the other, policymakers often have a hard time allowing scheduled spending reductions or tax increases to occur. Thus, the actual budget implications of the bill may be worse than what CBO’s analysis suggests.

I haven’t watched the video, but my recollection is that I made points 1 and 3, but didn’t manage to work point 2 in.

On the lighter side, you will also see that (a) I still haven’t mastered my collar and (b) judging by my wife’s laughs, there’s an amusing moment at the end where you can tell that they are whispering in my ear: “You are still on camera.”

If you read CBO’s analysis carefully, you will see that it says no such thing. Instead, it says that the provisions in the bill that expand health insurance coverage will cost $829 billion over the next ten years.

Why is that an important distinction? Because, as I noted the other day, the bill increases federal health spending in other ways. For example, it spends about $11 billion to avoid a sharp reduction in payment rates for doctors in Medicare at the end of the year. And it spends almost $21 billion to make the Medicare drug benefit more generous.

If you go through the CBO cost estimate and add up all the new health spending programs, you will discover that the actual cost of the bill is more than $900 billion:

Perhaps I am nuts, but I think that policy debates should be informed by actual facts, including about budget impacts. And despite the ease with which I have learned to throw around the word “trillions”, I still think $75 billion is a lot of money.

So let me once again implore everyone commenting on the health debate: There is a difference between the cost of the Baucus bill ($904 billion) and the cost of its provisions to expand coverage ($829 billion). It is understandable that most commentary focuses on the health insurance provisions. But we should not forget the other $75 billion in spending on other initiatives. Dollar-for-dollar they deserve as much scrutiny as the coverage expansions.

Note on the numbers: The spending on the doctor fix is easy to find in the CBO report; it’s the first item on page 5 of the detailed estimates of direct spending impacts. The increases in other health spending programs are sprinkled through the nine pages of the direct spending analysis. I calculated the $64 billion figure by adding up all the individual line items that increased direct spending, with a couple of exceptions. First, I did not include the interaction effects that CBO lists as the end of the estimate because I was not sure how to allocate them; the interactions are large and could have a material effect on my estimate, potentially up or down. Second, there were a couple of programs in which it seemed appropriate to net a spending increase against a cost reduction before including it in my total (those cases were small). I am certainly open to other suggestions about how to add up the other spending in the bill.

Everyone involved in the health care debate is waiting expectantly to see the Congressional Budget Office’s analysis of the newly-revised Baucus health bill. That estimate may arrive on Wednesday, which could allow a vote in the Senate Finance Committee as early as Thursday (but quite possibly later).

In preparation for that release, I have one simple request: Could everyone please take more care in characterizing the cost of the revised bill? And the cost of the other health bills?

To date, there has been much unnecessary confusion about the cost of the health bills now being discussed in Congress. Using the same budget estimates, observers often report very different figures for the same bill. When Senator Baucus unveiled the initial draft of his bill, for example, he described it as costing $856 billion over ten years, but many observers looked at the official cost estimate and concluded that the bill would actually cost $774 billion. The House Tri-Committee bill has generated an even larger range of claims. Some observers have characterized the bill as costing about $1 trillion over ten years, while others have pegged the cost at almost $1.3 trillion or more than $1.5 trillion.

Why do these figures vary so much? Because the health bills are trying to do many things:

Increase coverage through higher Medicaid spending and “carrots” such as subsidies for purchasing insurance through an exchange or tax incentives to get coverage.

Increase coverage through “sticks” such as penalties for individuals who don’t have coverage.

Prevent Medicare payment rates for doctors from being cut by more than 20% at the end of the year, as would happen under existing law.

Increase revenues by raising other taxes (e.g., new taxes on health providers, taxes on high earners, or reduced income tax deductions).

Reduce spending on federal health programs to pay for the other expansions (e.g., reduce provider payment rates and roll back Medicare Advantage).

When observers characterize the overall cost of the health bills, they must choose (whether they know it or not) which of these items to include.

That decision is easy for the last two items on the list since they are offsets that are otherwise unrelated to health insurance coverage. The confusion thus arises with the first five items on the list.

If observers want to characterize the total cost of the bills, they should include not only the cost of expanding coverage (category 1), but also any provisions that would increase other spending. In other words, the total cost of a bill includes items that address the Medicare doctor “fix” (category 3) or raise other federal health spending (category 4). Those are often overlooked, however, because the official cost estimates group those provisions together with items from category 7, the provisions that reduce health spending. To get to the right figures, observers need to dig into the details of the cost estimates.

If observers want to characterize the total cost of expanding coverage, they should focus solely on category 1, the new spending and subsidies that would expand the number of people who have health insurance.

If observers want to characterize the net cost of expanding coverage, they should combine categories 1, 2, and 5. The “stick” measures in category 2 should be included because they encourage individuals to purchase health insurance or encourage employers to provide insurance to their workers. However, they do so in a way that reduces the net cost to the government. The tax increases in category 5 should be included because they reduce coverage.

Participants in the health care debate should take much greater care in distinguishing those three measures of cost. In principle, cost estimates from the Congressional Budget Office include enough information to calculate each of them. In practice, however, exact figures may sometimes be difficult to calculate. To determine increases in other health spending, for example, one can identify each provision that increases spending and add those together to get a gross amount of new spending. But it may not be possible to determine how interactions among policies (which CBO often scores separately) should be betted against those provisions. Thus, there will be uncertainty about estimates of the total bill cost (as Senator Baucus discovered).

The following table illustrates these calculations for the Baucus bill and the House Tri-Committee bill:

When I worked for the White House, I discovered that you could learn a lot about your co-workers — or, at least, their portfolios — by their TV habits. Some people watched CNBC, some Fox, and some CNN. And some even managed to get through the work day without turning their TVs on.

I have always been firmly in the CNBC contingent, so I was particularly happy to appear on Squawk Box this morning. Here’s a link to a video of the interview (sorry, I still haven’t mastered the embedding of videos from news sites.)

Going in, my main talking points on the health debate were:

From a budget perspective, the Baucus bill is much better than the House bill. As Chairman Baucus has said, his bill would increase spending by more than $800 billion over the next ten years. On a comparable basis, the House bill would increase spending by more than $1.5 trillion. That’s a huge difference.

My biggest budget concern about the Baucus bill involves the offsets he proposes to pay for those increased costs. Some of those offsets presume that we can make substantial future cuts to payment rates for various Medicare providers. The trillion-dollar question is whether we will actually have the backbone to make those cuts when the time comes. Our recent experiences with doctor payments in Medicare should give us all pause on that front. In addition, there’s the hard question of whether we should be using the “easy” offsets to address our existing fiscal crisis instead.

From a budget perspective, the Baucus bill is a major step forward from the earlier HELP and House bills. There remains lots of room for improvement, and I am certainly not endorsing the bill at this point. But I do believe that Chairman Baucus and his team deserve credit for improvements on at least four important fronts: overall budget impact, doctor payment rates in Medicare, tax increases, and communications.

1. On paper, at least, the bill satisfies three key budget tests. It doesn’t add to the deficit over the ten-year budget window, it doesn’t add to the deficit in the tenth year of the window, and it doesn’t add to the deficit in years beyond the window. Indeed, it appears to reduce the deficit over each of those periods.

As CBO hinted in its cost estimate and Greg Mankiw discusses on his blog, there are reasons to doubt whether some proposed spending reductions and tax increases would actually materialize. Thus, the actual budget effects may not be as rosy. That’s a huge issue. But even with that caveat, the Baucus bill is a major improvement over proposals that didn’t even try to hit these budget targets.

Yesterday, Senate Finance Committee Chairman Max Baucus released his much-awaited health care proposal. In his announcement, he described it as a costing $856 billion over the next ten years, costs that would be more than paid for by other spending reductions and tax increases.

Later in the day, the Congressional Budget Office released its preliminary estimate of the budget impacts of the bill. That estimate shows a $774 billion cost for the bill’s provisions that expand coverage. As a result, some commentators have suggested that Baucus somehow misspoke and over-stated how much his bill would cost by more than $80 billion.

That is not correct.

Why? Because the bill does more than expand coverage. It also increases spending on various health programs.

For example, it provides a one year “doctor fix”, delaying by a year dramatic cuts in Medicare payment rates. CBO estimates that provision has a ten-year cost of about $11 billion.

The bill also expands the prescription drug benefit in Medicare. That provision would cost more than $17 billion over ten years.

Those two provisions alone imply that the bill costs a bit more than $800 billion. And there are numerous other spending increases that would cost at least a few tens of billions more. I must admit that I couldn’t find my way all the way up to $856 billion when I quickly reviewed them, but it’s clear that the true cost of the bill is notably higher than $774 billion for the coverage expansions alone.

The larger point is that we should be careful to identify all the important provisions in these competing bills, and keep track of gross budget impacts, not just net impacts. I raised this issue in my discussion of the House health bill. That bill was often touted as costing around $1 trillion over ten years, but the actual cost of expanding coverage was closer to $1.3 trillion. And a permanent fix to the Medicare doctor issues would have added more than $200 billion to that.

I haven’t gone back to look at all the details, but on apples-to-apples basis, the House bill would cost at least $1.5 trillion compared to the $800 billion plus of the Baucus bill.

I think Chairman Baucus should be commended for trying to inject some gross (in the good sense) figures, rather than net ones into this debate. That can only improve the quality of the discussion. (But it would be great to get some more guidance on how to get to exactly the $856 billion figure).

Note for budget geeks: The biggest net-vs-gross question is how to think about the $30 billion budget impact of premium interactions. If those interactions are happening because of efforts to reduce costs, then they shouldn’t be included in the gross cost figure. If they are happening because of efforts to increase costs, then they should.